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Firm F, a calendar year taxpayer, owes a $200,000 long-term debt to an

unrelated creditor. In December, it paid $14,160 to the creditor as interest for the 12-month period from the prior September 1 through August 31 of the following year. Compute the deduction for this payment assuming that:

 a. Firm F uses the cash method of accounting for tax purposes.

 b. Firm F uses the accrual method of accounting for tax purposes.

 

2. Brillo Company uses the calendar year and the cash method of accounting. On December 29, 2016, Brillo made the following cash payments. To what extent can Brillo deduct the payment in 2016? 

 b. $79,000 of inventory items held for sale to customers.

 c. $1,800 to purchase a new refrigerator for the employees’ lounge. The refrigerator was delivered on January 8, 2017.

 d. $4,800 retainer to a consultant who spent three weeks in January 2017 analyzing Brillo’s internal control system.


3. RTY is a calendar year corporation. On December 12, RTY billed a client $17,800 for services rendered during October and November. It had not received payment by December 31. On December 10, RTY received a $4,000 check from a tenant that leases office space from the corporation. The payment was for next year’s January and February rent.

b. If RTY is an accrual basis taxpayer, how much income should it recognize from the above transactions this year?

services performed?  prepaid rent? 


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